Is Real Estate Really the Great Investment You Thought?

Real estate can be a great long-term investment. But not all real estate appreciates at the same rate, and adjusted for inflation, it might not offer the returns you’re looking for. That being said, you do have to live somewhere, and there are some definite arguments in favor of your housing payment making you money as an investment instead of making your landlord money in a rental property. If you’ve ever wondered about the truth of real estate as an investment, this is what you need to know:

Returns Adjusted for Inflation are Stable, but Not Phenomenal

Realistically, the returns you’re likely to get on real estate as an investment aren’t phenomenal. In spite of the popular belief that real estate is a good investment, inflation-adjusted home prices from 1890 to 2005 rose at a rate of slightly less than 1 percent. In the grand scheme of investments, this isn’t great. Add in the costs of taxes, insurance, maintenance and other home-related costs, and the return isn’t what most people probably expect.

Consider the example of a home purchased in 1945. This home sells for 10 times its purchase cost in 2005. The simple return on this property is 900 percent. But the real, inflation-adjusted annualized return was less than 1 percent.

Earn Money as You Live

While it’s true that real estate, adjusted for inflation, doesn’t offer the dramatic returns you might get from other investments – housing expenses are somewhat of a necessary evil. Whether you’re renting or buying your home, you have to live somewhere, and you’ll be paying someone for the home.

If you’re paying a landlord, he’s the one making money off of your rental income. But if you’re paying a mortgage payment, you’re building equity in your home; equity which you can later use for things like sending your kids to college, making improvements to the home, investing in a start-up company or other cash outlays. Or you can gradually pay off your home and enjoy living somewhere payment-free. Either way – it’s an investment you won’t be making if you’re renting, which makes home ownership a better investment option.